In small business management, success is dependent on the ability to effectively manage costs while maximizing revenues. In many industries, labor is a major source of costs, so it's important to make decisions with payroll expenses in mind. Payroll sales ratios are a tool that helps small business owners analyze the relationship between their labor costs and their sales revenue.

Basics of Payroll Sales Ratios

Payroll sales ratios are a financial tool business owners used to evaluate their management efficiency. In the healthcare industry, for example, payroll costs constitute the single largest expense, accounting for up to 54.5 percent of total costs, according to one of the industry's trade publications, the "MHEDA Journal," published by the Material Handling Equipment Distributors Association. At the same time, cutting payroll often can result in losses, as qualified employees are critical to meeting customers' needs. Payroll sales ratios help owners balance this concern by indicating how effectively businesses are turning their labor investment into a sales return.

Revenue Per Employee

The payroll sales ratio that provides insight into the efficiency of the company's operations is revenue per employee. To figure this ratio, you simply divide the company's total sales revenue by its number of employees. This ratio is often compared with competitors or companies of a similar size to get an idea of the company's productivity. For example, large companies like Wal-Mart generally realize $170,000 in revenue per employee, while less labor-intensive businesses like Microsoft see up to $646,000 in sales per employee.

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Sales to Payroll

While revenue per employee is helpful for assessing productivity and comparing firms with competitors, it does not take into account how much each employee costs. The sales-to-payroll ratio is one of the most straightforward payroll sales ratios -- it's simply payroll expressed as a percentage of total sales. This number is sometimes more useful for controlling costs, as businesses that spend significantly more of their revenue dollars on payroll costs are less likely to have enough left to deliver a profit to investors.

Personnel Productivity

The personnel productivity ratio provides information about the company's payroll cost controls efforts and its productivity at the same time. This is useful because expensive employees are usually more productive, and cutting salaries can result in lost revenue or diminished productivity, as well as retention challenges. Looking at personnel productivity -- payroll's percentage of the gross margin, which is sales, less the cost of goods sold -- helps managers assess both the effects of margin growth and the effects of payroll declines. This is one way to chart a strategy that is more likely to grow the business, and to decide whether more growth would be expected from boosting margins or from cutting payroll.

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About the Author

Matt Petryni has been writing since 2007. He was the environmental issues columnist at the "Oregon Daily Emerald" and has experience in environmental and land-use planning. Petryni holds a Bachelor of Science of planning, public policy and management from the University of Oregon.